The authors report the results of laboratory experiments in which subjects are offered contracts structured similar to equity compensation packages and result in subjects receiving cash payments that are a function of their effort and random factors. The authors compare the outcomes from alternative contractual forms to theoretical benchmarks and report the efficiency of the contracts to provide evidence on whether options or stocks that have same economic cost to the employer yield the same or different effort levels from the managers. Both contracts elicit lower levels of effort than would be chosen by an expected-payoff-maximizing decision maker. Effort choices under the option contract did not differ significantly from effort choices under the stock contract except for male subjects. The option contract elicits a higher effort level for these subjects and condition than the stock contract. Effort choices reflect loss aversion and regret based on past stock price realizations.
All Science Journal Classification (ASJC) codes
- Experimental and Cognitive Psychology